Question

1. You are a big winner in the Ohio state lottery, redeeming a ticket for $100,000 per year until you retire. Instead of working 40 hours a week, you decide to work 20 hours a week for 50 weeks per year at your job.
   1. What is the income effect of this win? You will need to find a specific value. (Hint: find the reduction in total hours worked and use the equation for the income effect given in class to find a specific number)
   2. What is the substitution effect of this win? You do not need a specific value, just a general assessment of how the substitution effect would affect hours.

Income effect given in class= change in hours/ change in wage

Answer 1

Hi

So the answer of the following question are as follows :

Ans.A) As your net income increases by {100000 - (weekly wage rate*20)} dollars since your lottery earnings are added to your income only if you continue to work and hence it is in your interest to do so albeir for a reduced number of hours.

Ans.B).Now as You started to value the leisure a lot more as compared to the marginal benefits of working 20 extra hours weekly since your marginal utility of money has decreased given that now 100000 you receive from the government.

I hope I have served the purpose well.

Thanks.